The Size Distribution of Fame Loan Waivers - IndiaSpend
The Parallels Between Farm Loan Waivers and Corporate NPAsSec 29 (A) of IBC 'stretched too far', needs clarity: SBI chief Section 29 (A) of the IBC deals with related-party provisioning and aims to prevent defaulting promoters from taking back their companies. "If one company is in default, you can stop the related party or brother or family member, if they are in the same enterprise, but not being allowed them to bid for any other enterprise and debarring them cannot be logical," he added. While the above is just an extract from a latest news item in The Economic Times of 17th January, 2019, for anyone who follows popular press regularly, it is not uncommon to hear PSB chiefs batting for and justifying their lending to large corporate houses despite ballooning NPAs over the years. But how often have the same people been heard supporting the clean up and start of a fresh round of lending to the farm sector? Instead, what we have regularly heard is on the following lines. Farm loan waivers: Worried bank chiefs sound dissent note “It is a deadly poison. It’s a wrong way of addressing the real issue,” United Bank of India’s managing director Ashok Kumar Pradhan said. An instinctive reaction would be to accept that the different approaches to the two problems is but natural —“How can farm loan waivers have anything in common with corporates’ non-performing assets (NPAs)? Isn’t one decision entirely political and the other entirely commercial? Are farm loan waivers not hogged by large farmers while corporate NPAs are spread across the spectrum of large and small businesses? " This paper aims to question this knee jerk reaction. A farm loan waiver is a sector-wide extinguishing of loans mandated by the government, usually before an election, with the exchequer compensating banks. On the other hand, a corporate NPA represents a business failure, for reasons internal and external, and triggers a bankruptcy process to recover dues by financial creditors to the maximum extent possible—either through resolution or through liquidation. A bankruptcy process does not imply any liability of the government, unless very large in magnitude. The government obligation can be more pressing if NPAs originate in public sector banks or are due from public sector corporations. A key underpinning of bankruptcy procedures is the limited liability clause that protects the assets of promoters unless explicitly pledged. Corporate bankruptcy, therefore, is a simultaneous process of cleansing bank balance sheets and a mechanism allowing optimal risk-taking by entrepreneurs. Effective functioning of a bankruptcy law is expected to enable the generation of new cycles of credit, with credit flowing to better projects in similar or entirely new sectors. On the other hand, a farm loan waiver impedes the flow of such credit as structural problems besetting agriculture are typically not addressed. Couched in these terms, corporate bankruptcies and farm loan waivers indeed appear to have nothing in common. The equivalence arises when conditions warrant that the state must indirectly bear the burden of corporate NPAs by infusing funds into banks, as had happened in the US following the 2008 financial crisis and as is happening now in India. Equivalence can also be drawn when the problem of corporate NPAs repeats itself in the same sectors implying that, for some reason, banks keep lending to the same sectors even in the absence of structural improvements. Persistent problems in power and infrastructure sectors and the fate of development finance institutions before some of them converted to universal banks immediately come to mind. A further parallel between farm loan waivers and corporate NPAs is that both benefit the large entities in the ecosystem. The Size Distribution of Fame Loan WaiversWhile popular opinion on farm loan waivers vilifies the poor & marginal farmer, the reality is that these small farmers are least benefitted by agricultural credit from the formal sector and, therefore, do not benefit from loan waivers at all. The waivers announced by governments are not applicable to non-formal sources of credit. Agricultural credit in India is now mainly large ticket and goes towards corporate activity in the farm sector.Let us now see what data tell us about the growth rates of agricultural credit in India over the years and also understand what might likely have caused the growth.Annual Growth RatesPeriodAgri CreditTotal Bank CreditAgri GDP1981-19916.883.51991-20012.67.32.82001-201117.815.73.3(source: Economic Survey, 2014-15)A casual observation of the figures from the above table might reveal that the banking sector in India has been very supportive of agriculture. To anyone not familiar with banking regulations in India, juxtaposition of annual growth rates of agricultural credit, total bank credit and agricultural credit brings to mind two puzzling questions:1. Why did agricultural credit grow so fast in the 10 years between 2001-2011 when agricultural GDP grew at a slow rate of just 3.3pc per annum?2. Did high growth in agricultural credit lead to growth in total bank credit or vice versa?A more informed look at the same numbers tells us that the growth in agriculture did not cause the growth in agricultural credit. The case was the same when trying to reason causality in the reverse direction: that the growth in agricultural credit did not cause growth in agriculture. The invisible hand operating here is the hand of ‘regulation’. Banks in India are mandated to lend ~40% of their Adjusted Net Bank Credit (ANBC) to Priority Sectors of the economy (with a sub-limit of ~18% for agriculture). Strong growth in bank credit to industry and other segments of the economy have, as a by-product, led to the growth of agricultural credit. Not only is the growth of agricultural credit mainly in the ‘big-ticket’ segment, two other things stand out: most agricultural credit is disbursed just before the end of the financial year for banks to meet their priority sector lending targets (off-season for credit demand in farm sector as such) and an increasing & large proportion of agricultural credit is disbursed via bank branches in urban India. Additionally, in response to a Right to Information (RTI) application filed by The Wire, RBI has revealed that Public Sector Banks handed out Rs 58,561 crore to 615 accounts in agricultural loans in the year 2016. On average, each account has been given over Rs 95 crore in agricultural loans.(source: Ramakumar & Chavan, 2014)Having established the proximate cause of growth in agricultural credit in India, we now see how the the borrower profile changed in agricultural credit has changed over the years.As one can see from the table below, the share of high value loans i.e. loans above Rs 10 lacs, increased sharply between 1990 & 2011 from 4.1% to 23.8% of all ‘direct’ agricultural credit. At the same time, the share of small loans i.e. loans below Rs 2 lacs, decreased sharply between 1990 & 2011 from 92.2% to 48% of all ‘direct’ agricultural credit.(source: Economic Survey, 2014-15 + Ramakumar & Chavan, 2014)But with inflation over time, is it fair to expect the loan tickets sizes to remain small? Surely not. Considering an average inflation rate of 7pc per annum over the twenty-one years period between 1990 and 2011, prices should have doubled ~ every 10 years. That means that a loan of Rs 25,000 in 1990 would double to ~Rs. 50,000 by 2000 and be ~ equal to Rs 100,000 by 2011. This then implies that the share of loans below Rs. 100,000 in 2011 should have roughly remained, at the least, at 58.7%. However, in reality, the share of all loans below even Rs. 200,000 was about 41.4% - much lesser than the 58.7% plus (as is the case for loans less than Rs. 25,000 in 1990 in the table below). The story is the same whether one looks at total or only direct credit to agriculture as observed from the following two tables. (source: Economic Survey, 2014-15 + Ramakumar & Chavan, 2014)The increasing and high percentage share of big-ticket loans in agriculture does suggest that the corporatized ‘farmer’ is enjoying the benefits of the way regulator has incentivised the banking sector. On the other hand, the small & marginalised farmer now depends heavily on non-institutional and expensive forms of credit. As the table below shows, over dependence on usurious finance for small/ marginal farmers is reflected in the very low (14.9%) share of farmers with land holdings less than 0.01 hectares of access to institutional credit.source: Banik, 2018 (Economic & Political Weekly)Does the government address the indebtedness issue of the farmers when they owe so much to informal lenders? In the financial year 2017-2018 and year to date in the current financial year, various state governments have announced loan waivers totalling ~Rs. 168,650 crores.StateRs croresKarnataka44,000MP38,000UP36,000Maharashtra34,000Chattisgarh6,100AP3,600Telengana3,000TN1,800PB1,500Assam650Total168,650Source: Bloomberg Quint – 19Dec18Depending on the specific conditions of the waivers and whether they are announced by Central or State governments, farm loan waivers relate to the institutional/ banking sector credit and surely do not cover private & non-institutional sources of credit. This implies waiver benefits don’t reach the smallest farmers dependent on such non-institutional sources of credit.Keeping aside the borrower profile for a moment, what do data tell us about the possible end-uses of agricultural credit?From 2001-02 onwards, there has been a sharp divergence between agricultural credit & agricultural capital formation. There has been much faster growth & consequently a much higher overall share of short-term crop loans vs term loans to finance investments. (source: Ramakumar & Chavan, 2014)So, could it be that government spending on capital formation has led to this divergence?As the two tables with Gross Capital Formation in agriculture below show, the contribution of public sector in total amount spent as well as a percentage of GDP has stagnated between 2004-05 and 2010-11. At the same time, while the share of private sector as a percentage of GDP has remained constant during the same period, the absolute amount spent has almost doubled (with prices held constant at 2004-05 levels).Having explored the situation on the agricultural credit side with the help of publicly available data, we now turn attention to the situation on the industrial credit side.The Size Distribution of Corporate NPAsWhat is the extent of concentration in lending by banks to corporates? Source: Report on Trend and Progress in Indian Banking, RBI- 28Dec2018Total gross bank credit was ~Rs. 71.5 lac crores as of Mar2017 and and ~Rs.77 lac crores as of Mar2018. Of this, agricultural credit was ~Rs. 10 lac crores for both periods reflecting 13-14% share in overall bank credit. Total credit to industry was ~Rs. 26-27 lac crores during the same periods reflecting a share of ~35%. Within this, the exposure to large borrowers which the RBI defines as borrowing facilities above Rs. 5 crores, was ~Rs. 22 lac crores. It must be noted that the total credit to top 10 corporates, as per a research report titled ‘House of Debt’ published by Credit Suisse, as of Mar15 was ~Rs. 7 lac crores (accounting for 10-15% of total bank credit, ~27% of total credit to industry and ~34% of total credit to large industry segment, depending on the time period chosen). For the same period, total gross bank credit was ~Rs. 61 lac crores and the total credit to agricultural & allied activities was Rs. 7.7 lac crores. This clearly shows that what the entire agriculture sector owed the banking system was similar to the amounts borrowed by the top Indian corporates. This will also include a component of funding raised via debt capital markets but our estimate is that it will be a very small proportion. The amount of debt on the books of top 10 Indian corporates as of 31Mar15 was:Group Rs. CrsAdani 96,000 Essar 100,000 GMR 48,000 GVK 34,000 Jaypee 75,000 JSW 58,000 Lanco 47,000 ADAG 125,000 Vedanta 103,000 Videocon 45,000 Total 731,000 Now, let us try to understand the total extent of the corporate NPA problem in the Indian banking sector.According to RBI data, total gross NPAs in the Indian banking were ~Rs. 8 lac crores and ~Rs. 10.3 lac crores as of Mar2017 and Mar2018 respectively. Top 12 NPAs that make up ~25% of total NPAs (approximate because the figures vary with the cut-off date) in the banking sector were identified and referred to the NCLT by RBI in 2017. The share in NPAs of large borrowers (defined as > INR 50mn exposure) has been increasing over time- with a share in total advances of ~40%, large borrowers had a share in total stressed assets ~ 70% as on end of FY17) 2(source: RBI) | Large borrowers defined as exposures above INR 50mn2Of the top 12 NPA accounts mentioned above, four have been resolved within a year with about 52% recovery, representing only 14% of the dues from these 12 accounts as shown in the table below. Rs crDuesRealisation% RealisationHaircutResolved inElectrosteel13,1755,32040%60%Apr-Jun18Bhushan56,02235,57163%37%Apr-Jun18Monnet11,0152,89226%74%Jul-Sep18Amtek12,6054,33434%66%Jul-Sep18Total92,81748,11752%48%Total due from 12345,00014%(recovery so far)(source: compiled from IBBI Quarterly Newsletter)Upon further research on the topic, we see that for a group of other large exposures (for our purposes defined as higher than Rs. 1000 crores) recovery of dues has been to the extent of ~30%.Other large a/csDuesRealisation% RealisationHaircutResolved inZion Steel5,367150.3%99.7%Jul-Sep18Adhunik Metals5,3714108%92%Jul-Sep18MBL Infra1,4281,597112%NAApr-Jun18Kohinoor CTNL Infra2,5282,24689%11%Jan-Mar18Sree Metalik1,28760747%53%Oct-Dec17Total15,9814,87531%69%We looked at RBI data on segment wise performance of exposures of banks to address this question. We analyse two time periods: position as of 31Mar2001 and then the position between the period Mar09 and Mar13. Contributions to total gross NPAs of the banking sector by large industries, medium industries and agriculture as of Mar01 were 21%, ~15.8% and 13.3% respectively. Next, for industries (overall) and agriculture, we consider the movement in percentage of total impaired asset ratios between 2009 & 2013. Around 10.2% of all loans to industries were impaired in Mar2009 and this increased by 5.8 percentage points to 16% by Mar13 (and the position has only worsened after 2013 as shown by the more recent numbers quoted above). For agriculture, 5.4% of exposure of the banking sector was impaired as of Mar09 and this worsened by 2.8 percentage points to 8.2% in Mar13.source: Muniappan (2002), RBI Deputy Governorat CII Banking Summit 2002 on April 1, 2002source: KC Chakrabarty (2013), RBI at BANCON 2013 on Nov 16, 2013On the other hand, corporate or industrial NPAs have persisted for many decades now and the banking sector seems to be lending to companies in same sectors that have failed to attract any structural change leading to a vicious cycle of credit growth followed by rising NPAs.We now ask if the interest rates charged by banks to different sectors of the economy are commensurate with the risks involved. Given the lack of data availability on actual interest rates charged to borrowers by banks, we have pulled together qualitative inputs that help the reader understand the extent of differences between interest rates charged to large industry vs what is charged to others. This is especially important given that the large borrowers have hitherto enjoyed the benefits of ‘evergreening’ or ‘restructuring’ of their loans by banks (see table below for share of different borrower segments in restructured standard advances). Risk premium charged by banks to borrowers over and above their cost of funds should reflect the historical loss rate from that segment. As we have seen above, the percentage of impaired assets of assets of banks in agriculture has been far lower than that in industry. source: KC Chakrabarty (2013), RBI at BANCON 2013 on Nov 16, 2013The then RBI Governor-YV Reddy, in a speech delivered at the National Institute of Bank Management (Pune) on January 6, 2004 acknowledged that banks followed a sort of rule in lending: small industry loans at 11pc, agricultural loans at 10pc and industry loans at 7pc. <reference is RBI Bulletin of March 2004, soft copy attached to email and screen shot at the end of this note>As we also noted above, institutional credit, irrespective of rates, is not even available to the small and marginal farmer and they depend primarily on non-institutional sources of financing. The Sector Specificity of Corporate NPAsIt can be claimed that the agricultural sector suffers from structural bottlenecks and repeatedly has to be bailed out. However, corporate lending moves from sector to sector in response to emerging opportunities and thus has a self-correcting feature. The persistent and increasing rate of corporate NPAs should be sufficient to disabuse us of this notion. However, it must also be noted that these NPAs repeatedly originate in similar sectors. For instance, of the top 12 corporate defaulters, all but one (Amtek Auto) belong to the infrastructure and heavy industry sector. In fact, of the top 10 borrowers of the Indian banking system, even if one leaves out ADAG & Videocon (the latter does have substantial interests in infrastructure and mining), all others have businesses primarily in pure play infrastructure and heavy industries. As can be observed from the following chart from RBI, both agriculture and services have seen their share of stressed assets falling between 2011 & 2015 whereas for Industries the situation has been the opposite. Within Industries, the situation has been that of acute stress in Medium & Large Scale Companies with both touching 20% of their advances under stress in Jun15. The two charts below provide valuable insights about what has been happening in the Large Corporates sector since 2005 which has led to the stress situation observed above. The first chart (source: RBI) provides an index of movements in Debt, Capex & Earnings between 2005 and 2015 of 1000 top non-financial & non-software companies in India. This chart clearly shows that companies have continued to pile up more debt while their capex has been falling since 2011. This is a combination of global economic & domestic policy factors resulting in slowdown in economic activity namely, lack of environmental clearances to projects, policy indecision, supply uncertainty, high input costs etc. The second chart from RBI data shows the rupee value of stalled projects in the Private sector & Government sector between 2008 & 2016. We can clearly see the elevated levels of stalled projects since Sep11. Key sectors that have suffered difficulties owing to the reasons mentioned above and contributing to a large share of the stress in the banking sector are: Mining, Iron & Steel, Textiles, Aviation & Infrastructure incl. Power & Roads. Stressed sectors have had a share of around 25% in the overall advances of the banking sector. However, the stress is reflected in their much higher contribution to the banking sector’s total stressed advances increasing from just <30% in Mar11 to more than 50% in Jun15 (chart below).030099000ConclusionAs in agriculture, the corporate NPA crisis is sector-specific, dominated by large accounts, not accompanied by adequate structural reforms, and expensive for the public exchequer. Further, the scale of the corporate NPA problem is an order of magnitude higher. If the recapitalization of banks is welcomed, why is a farm loan waiver not acceptable? It seems that the criticism of farm loan waivers reflects a view of the proper relation between the farm versus the non-farm sectors. It is believed that food prices for consumers must be kept low through restrictions on farmers and subsidies to consumers. The Organization for Economic Co-operation and Development (OECD) estimates that the average yearly revenue lost by Indian farmers between 2014 and 2016 on account of export restrictions, net of subsidies received, is ? 1.65 trillion. This model of development is no longer tenable. First, India can no longer rely only on exports and will have to look towards domestic demand to power its growth. And skewing income distribution away from 50% of the population will not help. Second, cities are unable to manage the influx of refugees from agriculture. Third, the Swaminathan report of 2006 clearly states that India’s food security cannot be achieved through imports, thus emphasizing the imperative of a healthy agricultural sector. Finally, from an ethical point of view, taking care of the big farmer who, unlike the corporate promoter, risks losing personal assets in the event of a default, is as important as taking care of the big businessman. In sum, structural problems in both the agricultural and corporate sector must be addressed with equal urgency. Empathizing with the corporate sector for its woes while deriding the farm sector for its alleged profligacy is a recipe for pitting town versus country in a battle that no one can win. Appendix ................
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